Problemyour company is considering a replacement of an old, Ask an Expert

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Problem:

Your company is considering a replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company products. Cost savings from use of the new van are expected to be $ 28,000 per year for 5 years. At which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight line method over its 5 year useful life.Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. The company's tax rate is 35%. The company's cost of capital is %15.

Requirement:

Question 1: What is the cash flow your company will receive from selling the old van?

Question 2: What is initial outlay required to fund this replacement project?

Question 3: What is the incremental operating cash flow per year?

Question 4: What is the terminal cash flow at year 5?

Question 5: Should your company take this project?

Note: Explain in detail and show all computations in proper way.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91167844

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